Rajagopala Ayyangar, J.
1. K. M. N. S. P. N. Nachiappa Chettiar was thekarta of an undivided Hindu family. In that capacity he was carrying on extensive money lendingbusiness in Ceylon. In the course of his moneylending business moneys had been lent to oneO. L. M. Abdul Majith, totaling nearly two lakhsof rupees upto the beginning of March 1930 andand on 3rd March 1930, the debtor executed adeed purporting to convey absolutely to the creditor by way of sale certain houses and lands for aprice of Rs. 2,03,300.
The deed recited that the 'said vendor doth hereby sell, assign, transfer, set over and assure unto the said vendee, his heirs, executors, administrators and assigns the aforesaid several lands and that the purchaser should hold the said several lands and premises conveyed to him with the appurtenances thereof absolutely. The consideration for the sale was made up of the principal amount of Rs. 1,88,950 due on 23 pronotes bearing dates between 2nd April 1925 and 31st January 1930, a sum of Rs. 6081-6-6 being the balance of interest due on these pronotes, a sum of Rs. 5200 appropriated to the principal and interest due on three other pronotes, Rs. 1430 retained with the vendee to pay up the arrears of assessment due to the municipality in regard to the properties conveyed, Rs. 1515 for the discharge of a debt owed by the vendor to a third person who was named, and lastly, Rs. 4334 paid in cash to the vendor to make up the round figure of Rs. 2,03,300.
Nachiappa, the vendee, entered into possession of the properties and enjoyed them as his own. Some of the items purchased were sold very soon after their acquisition. The total sum realised by these sales amounted to about Rs. 99000 and deducting these and adopting the value put upon thcm under the deed of March 1930, property having a book value of Rs. 1,04,384 thereafter remained in Nachiappa's possession and enjoyment. It might be mentioned that Nachiappa was realising the rents and profits from the properties which remained with him during the years 1930 to 1944. The significance of this latter date will be apparent in a little while.
2. Nachiappa died in 1938, leaving a will appointing his wife Valliammai Achi as his executrix, and she obtained probate of the will in the Courts of Ceylon, and the properties which remained unsold continued in her possession as executrix. At this stage Abdul Majith filed a suit in the District Court of Colombo on 4th January 1940, alleging that the transaction embodied in the deed dated 3rd March 1930, though purporting to be an absolute sale, was in reality a conveyance subject to an oral trust under which the creditor undertook to retain the properties for the purpose of discharging his indebtedness to him and with an obligation to retransfer such of the properties as remained after the debts were satisfied.
The plaint further averred that out of the rents and profits realised from the properties as well as from the Rs. 99000 realised by reason of the sales effected, the indebtedness of the plaintiff to Nachiappa had long ago been discharged and on this basis the plaintiff required Valliammai Achi to reconvey to him the balance of the properties which still remained unsold, as well as to have an account taken of all the moneys realised by the creditor and after adjusting them towards the debts payable by the plaintiff to pay over the balance due to him.
The suit was defended and contentions raised both of fact as well as of law. The District Judge of Colombo, who tried the suit, however repelled the technical objections raised to the reception of such evidence which contradicted the express terms contained in the deed of sale, upheld the case of an oral trust put forward by the plaintiff and practically decreed the plaintiff's suit as prayed for. The following were the findings on the material issues :
'I find that Nachiappa Chetty by his agent did promise to act as the trustee of the plaintiff and suggested to him to give over the entire management of his affairs to the said Nachiappa Chetty..... I hold that the value of the property transferred by the deed was very much in excess of the amount due to Nachiappa Chetty.....
The plaintiff is entitled to obtain a retransfer of the properties mentioned in schedules B and C (i.e., the properties which remained after the sales referred to already) on payment to the defendant, executrix of the estate of K. M. N. S. P. Nachiappa Chetty, whatever sum of moneys may be found due on accounts taken between the parties...... If on accounts taken it is found that Nachiappa Chetty and his estate has received any sum over and above the moneys due to Nachiappa Chetty from the plaintiff, the plaintiff will no doubt obtain a decree for such amount.'
3. In accordance with these findings the operative portion of the decree ran :
'In view of the above findings I direct that a decree be entered in terms of the above findings declaring (a) that the transfer deed No. 1604 of 3rd March 1930, was executed in trust for the plaintiff on the terms and conditions set out in paragraph 7 of the plaint and that the said Nachiappa Chetty held the said properties in trust for the plaintiff and (b) that the defendant be ordered to retransfer and convey to the plaintiff the properties mentioned in schedule C and as many of the properties as remain unsold out of the lands mentioned in schedule B on payment by plaintiff to the defendant of any sum of money found to be due on an accounting being taken.
The decree will also direct that if on accounts taken it is found that any sum of money is due from the defendant to the plaintiff that the defendant be decreed and adjudged to pay such sum or sums as may be found due ...... I further direct that accounts be taken as between the parties (a) an account of what is due to the defendant from plaintiff for principal moneys advanced and interest thereon from the various dates of the advances, interest being calculated at the rate of 9 per cant per annum from the year 1935; (b) an account of the moneys expended by. Nachiappa Chetty and the defendant in the management and control of the property transferred by deed No. 1604, the amount expended on account of the payment of rates and taxes and the amount of the income derived on account of rents and profits; and (c) an account of the amounts realised by the sale of the various properties conveyed by deed No. 1604 which were subsequently sold; in calculating the interest payable to Nachiappa Chetti or his estate out of the principal sums borrowed by the plaintiff interest will be calculated as aforesaid only upon such amounts as were outstanding on the various dates after deductions are made for the prices realised by the sales of lands and the net income derived from the properties by way of rent.'
4. This judgment was rendered on 25thSeptember 1942. Valliammai Achi preferred anappeal to the Supreme Court of Ceylon and thelearned Judges upheld the admissibility of the evidence of oral trust and confirmed the finding of factas that trust. The appeal was accordingly dismissed on 31st March 1944. Apparently the executionof the decree of the District Court was stayed pending an appeal to the Supreme Court, but when thisappeal was dismissed, the stay got vacated, Valliammai Achi preferred a further appeal to the PrivyCouncil where also she met with a similar fate, herappeal being dismissed by the Board on 24th April1947.
5. After 1944 by reason of certain interlocutory orders passed pending the appeal to the Privy Council, a receiver was appointed in regard to the properties comprised in Schedules B and C, and by April 1947, when the Privy Council dismissed the appeal, a sum of Rs. 49180 had been paid into Court by the receiver as the net income derived from the properties in his management. Soon after the dismissal of her appeal by the Privy Council the properties which still remained with Valliammai Achi and comprised in Schedules B and C to the plaint were reconveyed to the representatives of Abdul Majith, the last named having died by then.
The taking of the accounts between the parties, which had evidently been stayed pending the appeal to the Privy Council, was taken up in the later part of 1947. The main contest between the parties at that stage ranged round the legality and propriety of the direction contained in the decree of September 1942, under which the realisations by Nachiappa Chetty either from the income or by sale of the properties were first to be credited towards the principal amounts of debts and the balance, if any, being adjusted towards interest, the balance of such principal carrying interest.
If the normal rule of appropriation, namely, that moneys received by a creditor on account of the debtor should first be applied for discharging the interest and only the balance should go towards the reduction of the principal had been applied, over two lakhs of rupees would still have been payable to Valliammai Achi, but if on the other hand the direction in the preliminary decree of the District Court of Colombo were treated as a final adjudication which had to be given effect to, nearly two lakhs of rupees would have been repayable tothe debtor.
This matter was again the subject of considerable argument before the District Judge at the stage of what might be termed the final decree proceeding. It might also be mentioned that between 1930 when Nachiappa Chetty entered into possession of the properties covered by the sale deed in his favour, and 1944, when after the decision of the Supreme Court of Ceylon possession was handed over to a receiver appointed in the suit, Nachiappa and after him his executrix had together realised Rs. 1,82,860 as the net income, and it would have been seen from what we have stated already that these receipts formed part of the amounts treated as belonging to the debtor which went in discharge of the debts totaling Rs. 2,03,300 recited in the deed of March 1930.
The District Judge after elaborately discussing the contentions of the parties reached the conclusion, that the parties were bound by the previous directions contained in the decree dated 29th September 1942, which was affirmed without any variation by the Supreme Court and the Privy Council. Adopting, therefore, the basis set out in his previous judgment the learned District Judge passed a decree for Rs. 1,92,105 to be paid by Valliammai Achi to the plaintiff.
Valliammai Achi preferred an appeal to the Supreme Court, but before it came on for hearing, the dispute was settled out of Court by a compromise dated 21st March 1949, under which the conveyance of the unsold properties was confirmed and in the place of the sum of Rs. 1,92,105 decreed by the District Court the parties agreed that the plaintiffs should receive Rs.1,35,000 only in full quit of their claims, and that Valliammai Achi should be entitled to withdraw from Court the sum of Rs. 49,180 Which had been deposited by the receiver as representing the net collections from the properties between 1944 and the reconveyance in 1949. Valliammai Achi paid this sum of Rs. 1,35,000 and withdrew the amount from Court, all before 31st March 1949.
6. The assessment proceedings out of which, these references arise relate to a Hindu joint family of which Nachiappa was the karta. The assessee is an ordinary resident in India, and during the assessment year 1949-50, the account year being that ended' on 31st March 1949, the assessee claimed that it was entitled to deductions in relation to sums of (1) Rs. 1,04,384.78 or in round figure Rs. 1,04,400 being the value of the property retransfer after the decision of the Privy Council and (2) a sum of Rs. 1,35,000 which was paid under the compromise dated 21st March 1949, in the year of account.
Both these sums were claimed as losses incurred in the course of the money lending business, and in the alternative it was urged that the sum of Rs. 1,82,860, which had been the total realisation out of the rents and profits between the years of 1930 and 1944 and which sums Nachiappa had included as part of his assessable income of the relevant account years, should in view of the altered state of tailings be treated as a business loss incurred by the assessee.
These claims of the assessee were rejected by the Income-tax Officer and the Assistant Commissioner on appeal, arid the disallowance was sustained by the tribunal on further appeal. The assessee requested the tribunal for the reference to this Court of these points of law arising from this disallowance. The, tribunal referred under Section 66 (1) of the Income-tax Act the following which forms the subject of reference in R. C No. 81 of 1953:
'Is the assessee entitled to claim the deduction of (a) Rs. 1,35,000 and (b) Rs. 1,04,384 as losses incurred in the course of business'.
The Tribunal, however, refused to refer the other question raised in regard to the third of the above points but at the direction of this Court under Section 66 (2) of the Act a reference was made, and that forms the subject of R. C. No. 34 of 1955. The question there runs in these terms:
'Whether the assessee is not entitled' to adeduction of the loss at least to the extent of Rs.1,82,859 which had been assessed to income-taxand which became and was treated by the assesseeas the stock-in-trade of his business?' It will be seen that the questions raised by the tworeferences arise out of the same set of facts and aremerely different aspects of the same problem.
7. We do not consider it necessary or profitableto discuss the grounds or the reasoning upon, whichthe Tribunal rested their decision against the assessee but shall confine ourselves to the argumentsaddressed before us by counsel on either side. Weshall first deal with the contentions raised with regard to the questions propounded in R. C. No. 81of 1953. The argument of the learned AdvocateGeneral who appeared for the assessee was on theselines:
8. The assessee was a money-lender and his stock-in-trade originally consisted of money and the debts represented by the promissory notes. During the course of this money-lending business and in realisation of the amounts due to him the assessee had obtained a conveyance of the properties belonging to the debtor in full satisfaction of his debt. This was the basis upon which the assessee's accounts were made up. When land or other immoveable property is taken by a money-lender in discharge of a debt the property acquired assumes the character of the money-lender's stock-in-trade. For this proposition reliance was placed on Commissioner of Income-tax, Burma, v. P. L. C. M. Concern, Minhala,  2 ITR 417: AIR 1934 Ran 276, where Page C. J. in delivering the judgment of the Full Bench stated:
'. ....the assessees contend that each transactionin which land is received in satisfaction of an outstanding debt must be considered on its own merits.It is urged on their behalf that the land which isreceived in repayment of a loan is the equivalent ofcash, and should be treated as money's worth andas such not fixed capital, but working assets, andpart of the stock-in-trade of their business as moneyfenders'
and later in the judgment, the learned Chief Justice affirmed the correctness of this proposition. Our attention was also invited to the following passage in the judgment of Dunkerley J. in Commissioner of Income-tax, Burma v. A. K. A. R. Chettiar Family, (1941) 9 ITR 347: AIR 1941 Ran 263, where the learned Judge observed:
'.,...The assessee family carried on a money-lending business, and it has been pointed out in 9 ITC 82: AIR 1934 Rang 274, that in this country Chettiars are bankers and money-lenders and not landowners. They may be compelled to take over lands and other immoveable property in liquidation of debts due to them in respect of loans, but the land which is received in repayment of a loan is the equivalent of cash and should be treated as money's worth and as such not fixed capital but working assets and part of the stock-in-trade of their business as money-lenders.'
9. Based on the reasoning contained in these passages it was urged that by the transaction of conveyance dated 3rd March 1930, the assessee's stock-in-trade included lands of the value of Rs. 2,03,300. By reason of the reconveyance directed by the decree of the Court to which Majith's representatives became entitled, and which was carried out in the relevant accounting year a loss of this stock-in-trade was suffered by the assessee which he was entitled to deduct as a revenue loss.
10. Mr. Rama Rao Sahib, learned counsel for the Commissioner, urged two answers to this argument. The first was that the theory that when land is taken over in satisfaction of a debt due to a money-lending business the land becomes a stock-in-trade of the money-lender was basically wrong, and that nothing excepting money could constitute part of the stock-in-trade of that business.
His further contention was that when the land was taken over in lieu of debts, the land became merely an asset of the business with the result that any profit or loss incurred by reason of the sales effected of them subsequently could be treated as part of the money-lending business but this was not because land was converted into stock-in-trade, but only by reason of the sale of the land thus acquired being treated as a related or associated operation having a close and intimate connection with the money-lending Business, and being really ancillary to or in the nature of a necessary incident of that business.
Secondly, he submitted that even if the theory put forward by the learned Advocate General and which was prima facie supported by the passage in the judgments of the Rangoon High Court, which we have extracted above, were correct, there was no factual basis for the application of that principle in the present case. He pointed out that, though according to its apparent tenor the deed dated 3rd March 1930, constituted an out and out absolute conveyance, its real nature has been investigated and established by the judgments of the Ceylon Courts and affirmed by the Privy Council.
In view of these decisions which bound the assessees, it was open to it to contend that the real nature of the transaction of March 1930, was anything different from what had been found by the Courts. Judged from this point, Mr. Rama Rao Sahib urged that the assessee never became the full owner of the immoveable properties to justify the claim that they became a part of the stock-in-trade of its money-lending business.
The true nature of the transaction was that the assessee was placed in possession of certain properties in order that out of their rents and profits and out of the proceeds of sale, if any, of these properties, he should pay and adjust the amounts owing to it from Abdul Majith the debtor. If there were surplus properties remaining after the discharge of the debts and these were reconveyed to the real owner, there could be no question of any loss sustained by the assessee either in its stock-in-trade or even otherwise.
11. We consider that the second head of the arguments of the learned counsel for the department is well founded. The assessee cannot now go behind the judgments of the Courts and seek to impute to the transaction an effect contrary to that which the Courts have attributed to it. Notwithstanding that the assessee made in its books entries corresponding to the apparent tenor of the document, they have now to be judged only on the basis of the true relationship between the assessee and Abdul Majith.
The Courts have found in the litigation between the assessee and Abdul Majith what the real transaction embodied in the deed dated 3rd March 1930, was. The true nature of the transaction having thus been ascertained between the assessee and Abdul Majith, effect must be given to in every proceeding, and the assessee cannot urge thereafter, that as between itself and Abdul Majith the deed of March 1930, constituted an absolute conveyance.
12. In view of this conclusion of ours, we find it unnecessary in the present case to discuss or decide the first of the points raised by the learned counsel for the department. We hold that the properties covered by the deed dated 3rd March 1930 did not become the stock in trade of the assessee's business, and that the reconveyance to Abdul Majith's representatives of the properties of a nominal or book value of Rs. 1,04,384 did not, therefore, constitute any loss in the stock-in-trade of the assessee's money-lending business. The second portion of the question referred in R. C. No. 81 of 1953 is therefore answered against the assessee.
13. The other claim relates to the right to deduct Rs. 1,35,000 which was paid over to Abdul Majith's heirs under the compromise of the final decree in the suit filed by Abdul Majith. Though in the question as referred to the amount repaid is treated as Rs. 1,35,000, regard being had to the assessee having withdrawn from Court a sum of Rs. 49180 which was deposited by the receiver who was in possession of the B and C schedule items during the period from 1944 till the time of reconveyance, the latter amount should go in reduction of Rs. 1,35,000 paid over to Abdul Majith's representatives.
In this connection it has to be remembered that the result of the decision of the civil Courts was that the B and C schedule properties really belonged to Abdul Majith, and, if so, the income realised therefrom would naturally also belong to him and his representatives. If, therefore, the assessee were permitted to withdraw this sum from Court as a result of the compromise, its effect was really to operate as a reduction of Rs. 1,35,000 which was stipulated as the amount to be paid to Abdul Majith's representatives.
The reduction, therefore, which the assesses could at the most claim under this head would be not Rs. 1,35,000 mentioned in the question but Rs. 85820. The learned Advocate General contended that the assesses was entitled to claim a deduction of this amount for the income of the relevant accounting year on two bases: (1) as an expenditure incurred in the course of the business of money-lending which the assessee was carrying on, and (2) as a refund of an overpayment made to the assessee.
In our opinion the claim to the deduction of this amount is well founded. The assessee had lent out moneys to Abdul Majith. The realisation of those moneys was certainly part of the assessee's money lending business. The method adopted by the assessee for effecting the realisation was--we are proceeding on the nature of the transaction dated 3rd March 1930, as found by the civil Courts--to be put into possession of some assets belonging to the debtor and the adjustment of the debt out of the income etc. derived, and by this process the assessee had repaid himself the amount due.
The debtor, however, claimed that the manner of the adjustment of the realisations first to the interest accrued and later to the principal was wrong The assessee had litigated this claim, which was certainly a litigation in the course of the money-lending business. The debtor had succeeded with the result that the creditor was forced to reverse his entries, and instead of his being entitled to further sums from the debtor, had been forced to make a payment of Rs. 85,820 to the debtor.
In our opinion this repayment would certainly stand on the same fooling as the refund of an overpayment. Mr. Rama Rao Sahib, learned counsel for the department, did not contest the position, that if a debt due to a money lender was scaled down under enactments relating to the relief of debtors and the creditor became bound to refund what had been earlier collected, the excess payment would be admissible as a deduction.
14. In our judgment, the assessee was entitledto the deduction of this Rs. 85,820 also as a loss frombusiness.
15. The result is that the answer to the question in R. C. No, 81 of 1953 is that the assessee is entitled to a deduction of Rs. 85,820 as loss incurred in the course of his business, and that he is not entitled to claim any further sums under that head.
16. What remains to consider is the question raised for decision in R. C. No. 34,of 1955. It would be seen that from our narration of the facts that this sum represents the total amount of the income received by the assessee from the properties covered by the conveyance of 3rd March, 1930, between 1930 and 1944. Having regard to the nature of the transaction of March 1930, as found by the civil Courts this was the income belonging to the debtor but which the assessee was entitled to appropriate in discharge of the debts due to him.
Thus viewed, we do not see any legal basis upon which the claim of the assessee to treat this as any loss could be sustained. In fact this was put forward merely as an alternative to the deductions claimed in R. C. No. 81 of 1953, and in view of our answer in that reference this would not really arise for consideration. The question is, therefore, answered in the negative and against the assessee;
17. As neither party has succeeded in full therewill be no order as to costs in either reference.